Capital gains tax on stocks: how much do I pay?
This article will take you through everything you need to know about paying capital gains tax on your stocks.
Capital gains tax is paid on the profit you make from an investment.
Capital gains can be broken into short-term and long-term gains and are subject to different tax rates.
How much tax you pay on capital gains on your stocks will depend on a variety of factors.
A financial advisor can help you navigate the complex world of investments and tax, helping you make your money go further.
How does capital gains tax work?
Capital gains tax is paid on the profit you make from an investment. The tax is owed on any profit you make when selling an asset.
For example, if you buy a stock for $20 and sell it for $100, your capital gain is $80, and you will be taxed on this $80 alone. You do not pay tax on the original investment.
If you sell the asset for a loss, you do not pay any taxes.
Capital gains tax can also be broken into short-term and long-term capital gains. This will influence the rate of tax you pay.
Short-term capital gain is the profits you’ve made from investments or assets you’ve held for less than a year. Here, tax is paid as ordinary income and is subject to your income tax rates.
A long-term capital gain is the profit you’ve made from investments or assets you’ve held for over a year. The capital gains tax rates imposed by the federal government can range between 0% and 20%.
How much you pay will depend on a few factors, including your overall taxable income, filing status, and how long you owned the asset before selling it.
Other assets, such as collectibles, are subject to their own tax rate.
When do I pay capital gains tax on stocks?
You only pay capital gains on stocks if you make a profit.
You generally pay this tax when your taxes are filed for the given tax year, the end of the current tax year is at the end of the calendar year for individuals, with taxes due by April 15. You do not have to pay it immediately.
However, when you pay, this tax will also depend on how much money you owe.
According to the IRS, you must pay estimated tax if you expect to owe $1,000 or more when you file your return. Estimated tax payments are typically due April 15, June 15, September 15 and January 15 each year.
If you need help with your tax returns, a regulated financial advisor can help.
Unbiased can connect you with an SEC-regulated, fiduciary financial advisor in as little as 48 hours. Find your match here.
How much is capital gains tax on stocks?
As mentioned, how much tax you pay on capital gains on your stocks will depend on a variety of factors.
The current federal rates for long-term gains are based on your adjusted gross income (AGI) or taxable income and your filing status.
The breakdown of the rates is as follows:
|$0 - $47,025
|$47,026 - $518,900
|Married and filing jointly
|$0 - $94,050
|$94,051 - $583,750
|Married and filing separately
|$0 - $47,025
|$47,026 - $291,850
|Head of household
|$0 - $63,000
|$63,001 - $551,350
In 2024, if you’re a single filer and earn less than $47,025, you will not pay capital gains tax.
It’s important to remember your state may also impose capital gains tax.
Most states tax capital gains as income, with rates ranging from as low as 2.9% to as high as 13.3%, depending on the state.
Currently, only the following states do not tax capital gains:
How can I avoid capital gains tax on stocks?
There are various ways you can reduce the amount of capital gains tax you pay on your stocks.
1. Take advantage of tax-loss harvesting
This is an investing strategy that allows you to minimize the amount of taxes you pay on investments. Here, you can offset your capital gains with capital losses you’ve experienced in that tax year or carry over from a previous year's tax return.
Individuals can deduct up to $3,000 of capital losses against ordinary income.
In simple terms, you can sell any under or low-performing stocks and claim this loss, reducing the tax you owe on the sale of your higher-performing stocks.
2. Invest for longer
If you keep your investment for over a year, you can benefit from long-term capital gains tax rates. These are often less than income tax rates, meaning you can reduce your tax liability.
Depending on your taxable income, you may even be able to reduce your capital gains tax rate to 0%.
It’s worth doing the maths before making any big investment decision.
3. Utilize your retirement accounts
When you use stocks in your retirement accounts, such as a 401(k) or IRA, you do not have to pay capital gains tax.
You only pay tax when you withdraw from the account. By this time, you could be in a lower tax bracket and have a lower taxable income.
For Roth accounts, such as a Roth IRA, you pay tax when you contribute money, meaning your money can grow tax-free, and you do not pay any tax when you make withdrawals.
4. Consider donating to a charity
Donating to charity can help you reduce your taxable income via tax deductions.
Appreciated stocks can be donated to charity without incurring capital gains tax.
This might be a smarter option than selling your stocks, paying capital gains tax, and then making a cash donation to charity.
5. Includes stocks in your estate plan
If you have appreciated stocks, you could include these in your estate plan and pass them on to your loved ones.
When a stock is inherited, the cost basis is “stepped up.” Here, the IRA resets the original cost basis to the value of the stock when it was inherited.
If your heirs choose to sell the stock immediately, they will not pay any capital gains tax.
Get expert financial advice
If you need help reducing your tax liability, it pays to get expert advice. Doing this will ensure you’re reducing the amount of tax you may pay legally.
A financial advisor can help you navigate the complex tax world and potentially save you money.
Unbiased helps you find the right advisor to meet your needs.
Simply answer a few questions, and our dynamic platform will match you with an independent SEC-regulated financial advisor in as little as 48 hours.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.